NPS Vatsalya launched for kids: Know investment amount, eligibility, & more

Union Finance Minister Nirmala Sitharaman officially launched the NPS Vatsalya scheme on Tuesday. Managed by the Pension Fund Regulatory and Development Authority (PFRDA), the scheme is designed to secure long-term wealth for children.

The launch took place simultaneously across 75 locations in India, with other locations joining via video conference. New minor subscribers at these locations were also provided with  Permanent Retirement Account Number (PRAN) membership cards.

ICICI Bank also announced the launch of NPS Vatsalya at its service centre at BKC in Mumbai, Maharashtra as a part of the government’s formal launch across the country. It will run under the aegis of PFRDA.

“We are delighted to be part of the NPS Vatsalya launch scheme with the Government of India and PFRDA. We have begun this journey by opening our first set of NPS Vatsalya accounts today. We have equipped all ICICI Bank business centres across the country to open the NPS Vatsalya account for customers," said Sriram H, Head – Deposit Products, ICICI Bank.

ICICI Bank inaugurated the commencement of the scheme by registering the accounts of a few children under NPS Vatsalya. They also received a symbolic PRAN card for their NPS Vatsalya account.

What is the NPS Vatsalya scheme?

NPS Vatsalya is an extension of the existing National Pension Scheme (NPS) but focuses on children. Like NPS, the goal is to help parents save for their child’s retirement fund. Contributions to the account are invested in market-linked securities such as equities and bonds, aiming to provide higher returns than traditional fixed-income alternatives.

Under the scheme, parents can begin saving for their child's retirement from an early age, ensuring long-term financial growth through consistent investments.

NPS Vatsalya account can be opened through Points of Presence (POPs) which include major banks, India Post, Pension Funds, etc. and the online platform, e-NPS.

What are its key features?

"A key feature of NPS Vatsalya scheme is that it allows parents to start saving for their child’s retirement from infancy. With compounding, this scheme can enhance returns over time," says Adhil Shetty, CEO of Bankbazaar.com.

"When the child comes of age (18 years), their account will seamlessly transition into a standard NPS account. NPS Vatsalya will ensure long-term wealth accumulation. With flexible contributions starting as low as Rs 1,000 annually with no upper limit, it’s accessible to families across all economic backgrounds. Once the child attains the age of 18, the corpus of up to Rs 2.5 lakh can be withdrawn entirely and if it exceeds, the 20% can be withdrawn and rest 80% can be used for annuity purchase in the NPS,” he explains.

The main aim of NPS Vatsalya is to give parents the opportunity to invest in their child's future. Here are some key points:

— Parents can start investing with as little as Rs 1,000 annually.

— Different contribution and investment options are available, making it accessible to families of various economic backgrounds.

— The scheme allows parents to start saving for their child's retirement even from infancy.

— Compound interest can lead to substantial earnings over a long period.

Who is eligible for the scheme?

Eligibility for NPS Vatsalya requires the following:

— The child must be under 18 years old.

— Both the child and the parent must be Indian citizens.

— All parties must comply with the Know Your Customer (KYC) requirements.

What are the investment choices?

For the NPS Vatsalya Scheme, parents have several investment options based on how much risk they are comfortable with and their financial goals. Here's a simple breakdown:

1. Default Choice:  

Moderate Life Cycle Fund (LC-50): 50% of the investment goes into equities (stocks), which offer moderate growth potential with a balanced approach.

2. Auto Choice (Life Cycle Funds):  

This option automatically adjusts the investment based on your age, and there are three sub-options:

Aggressive (LC-75): 75% equity (higher risk, higher return potential).

Moderate (LC-50): 50% equity (medium risk and return).

Conservative (LC-25): 25% equity (lower risk, lower return).

3. Active Choice:  

Here, parents can directly decide how to allocate the funds:

Equity: Up to 75%.

Corporate debt: Up to 100%.

Government securities: Up to 100%.

Alternative assets: Up to 5%.

This gives flexibility for parents to pick the option that matches their preferences and financial plans.

What are the withdrawal rules?

After three years, partial withdrawals from the NPS Vatsalya account are allowed. According to the SBI Pension Fund website, up to 25% of the corpus can be withdrawn for specific purposes, including education, medical treatment for certain illnesses, or disabilities over 75%.

Subscribers are allowed up to three partial withdrawals before turning 18.

What happens when the minor turns 18?

Once a subscriber reaches 18 years old, they can choose to withdraw the funds. If the total corpus is Rs 2.5 lakh or less, they can withdraw the entire amount. If the corpus exceeds Rs 2.5 lakh, 20% can be withdrawn as a lump sum, with the remaining 80% used to purchase an annuity for regular income.

Alternatively, the subscriber can keep their account open and convert it to an NPS Tier I regular account. However, a fresh KYC must be completed within three months of the subscriber’s 18th birthday.

What happens in the case of death?

In the unfortunate event of a subscriber's death, the entire corpus is given to the nominee, usually the guardian. If the guardian dies, a new guardian must be assigned after completing a new KYC.

If both parents die, a legal guardian can manage the account without further contributions until the child turns 18.